Morgan Stanley: Financial Loser

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) was the loser among major U.S. financial names on Thursday, with shares down over 1% to close at $21.98.

The major indexes all showed solid gains, heading into the three-day weekend for the stock market. The S&P 500 ( SPX.X) closed at 14,574.70, above its previous closing record of 1,565.15, reached on October 9, 2007. The KBW Bank Index ( I:BKX) was down slightly to close at 56.27.

Banks in Cyrus reopened for the first time since March 16, as customers calmly lined up to make withdrawals after the island nation secured a 10 billion euro bailout for its floundering banking sector. The deal agreement allows Cyprus Popular Bank -- the second largest Cypriot bank -- to fail, with its performing assets folded into the Bank of Cyprus. Depositors in both of the nation's largest banks will take losses initially estimated at roughly 30% on balances above 100,000 euro, while smaller deposit accounts will be unaffected.

Depositors in Cyprus were initially limited to daily withdrawals of 300 euro, and other capital controls were imposed, allowing people leaving the country only to take up to 3,000 euro in cash, in any currency. The government of Cyprus also announced that "Businesses will be able to carry out transactions up to EUR5.000 per day, per account and pay staff salaries. Payments and or transfers outside the Republic, via debit and or credit and or prepaid cards are permitted up to EUR5.000 per month, per person in each credit institution."

Cyprus is paying a very high price to remain a member of the euro club. Early on Thursday, Credit Suisse's European Economics Team said it expected "real GDP to decline by more than 20% in the next couple of years, rendering many assumptions of the bail-out obsolete. Cypriot unemployment is likely to rise above 20%."

That means that Cyprus could well need an additional bank bailout. That's a very familiar story, when considering the situation in Greece. It's also worth noting that Iceland is not a member of the euro common currency, and the country has rebounded rather nicely from the collapse of its own outsized banking system in 2008. In its report on economic indicators for February, the Central Bank of Iceland said that its economic output had increased year-over-year, for five of the past six quarters. Iceland's unemployment rate at the end of 2012 was 5.4%, which compares quite well with most other countries.

Economic Reports Mostly Negative


The Department of Labor said that initial unemployment claims for the week ended March 23 increased by 16,000 to a seasonally adjusted 357,000, from the previous week's upwardly revised figure of 341,000. That's the sharpest rise in unemployment claims so far this year. Economists on average expected initial jobless claims to come in at 340,000, according to Zacks.

The four-week moving average for initial unemployment claims rose slightly to 343,000, up from the prior week's moving average of 340,750.

The Institute for Supply Management on Thursday said its Chicago Business Barometer -- The "Chicago PMI" -- fell by 4.4 to a reading of 52.4 in March, with new orders falling "sharply after three months of solid gains," and with production at its lowest since September 2009. Economists had expected the Chicago PMI for March to come in at 56.5. A level of above 50 indicates economic expansion.

The Bureau of Economic Analysis on Thursday released its third estimate of real gross domestic product growth for the United States during the fourth quarter. The GDP growth figure was revised to an annual rate of 0.4% for the fourth quarter, slowing from a rate of 3.1% in the third quarter. The Bureau said that the much slower growth pace in the fourth quarter "primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in personal consumption expenditures ."

Morgan Stanley


Shares of Morgan Stanley have returned 15% this year, following a 28% return in 2012. The shares trade for 0.8 times their reported Dec. 31 tangible book value of $26.81, and for 8.6 times the consensus 2014 earnings estimate of $2.56 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $2.12.

Morgan Stanley's stock tends to be among the most sensitive to European economic uncertainty. The company reported that as of Dec. 31, its net risk exposure to "European Peripherals," including Greece, Ireland, Italy, Spain and Portugal, totaled $6.3 billion.

The company on March 14 announced that the Federal Reserve had approved its 2013 capital plan, which included no dividend increase or share buybacks, but would include the purchase of the remaining 35% stake in Morgan Stanley Smith Barney, still held by Citigroup.

BernsteinResearch analyst Brad Hintz rates Morgan Stanley "outperform," with a price target of $24, and said in a report on Tuesday that "a number of changes arising from the final MSSB buy-in should provide Morgan Stanley with an incremental ~$385 million in earnings in the 12 months following the acquisition." Hintz expects the company's annual earnings-per share-to increase by 20 cents, once Morgan Stanley completes the acquisition.

"Perhaps more importantly, firm-wide returns on equity should also rise by ~70bps," once Morgan Stanley owns the entire brokerage unit, Hintz said. Morgan Stanley reported a modest return on equity from continuing operations of 3.6% for the fourth quarter.

Hintz estimates that Morgan Stanley will earn $2.15 a share this year, with EPS climbing to $2.60 in 2014.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.